38 Surplus & Surplus Management

Question 1

Why do analysis of Surplus/Profit [3]

Answer 1

• Assisting managers decision in:
  
  • fin effect of difference
    assumed and experience
  • fin most significant
    assumption to focus on
  • Distribution of Surplus
  • Reconcile value over
    consecutive years
  • management information
  • information on trends
  • mortality differences ident…
• Providing information to others:
  
  • executive remuneration
    schemes
  • accounts
• Data & Calculation checks
  
  • validity of calculations/
    assumptions used
  • independent data check
  • completeness of description
    in variance

Question 2

Carrying out an Analysis of Surplus [2]

Answer 2

* Compare expected to actual
    values
* Build models from developing
    stage with:
     - same assumptions 
     - model x actual # sold
     - make new accounts from this
* Compare the accounts 
* Annalise diviations
     - expenses compared on unit
       expenses not total

Question 3

Sources of Surplus/Profit [4]

reasons expected differ from actual

Answer 3

• Claims
  
  • mortality, morbidity, longevity
  • claim frequency or amounts
• Volume
  
  • new business levels: vol, mix
  • withdrawal, lapse, renewal
    rates
• Other Cashflows
  
  • investment income, expense,
    commissions
  • premiums/ contributions
  • failure of reinsurer
• Other Factors
  
  • salary growth & early retire
  • inflation: salary, claims and
    expens
  • taxation
  • fraud

Question 4

Levers of Surplus/ Profit [6]

managers control system to influence surplus

Answer 4

• Reduce likelihood of Claims
  
  • good underwriting for:
    New business & at claim.
    How?
  • customer incentive not to
    claim
• Reduce cost of Claims
  
  • cost effective claim manage
  • reinsurance
  • change benefits to: less, min
    guarantee, increase excess
• Control expenses
  
  • review yearly
  • claims = benefit
  • flexible premiums
• Increase renewal rate,
  lower laps rare
• follow investment policy to:
  
  • increase investment returns
    (subjectto acceptable risk)
• Adopt effective tax
  management Policy
  getting tax:
  
  • on time pay
  • efficient tax vehicles
  • allowances used.

Question 5

Distribution of Profit of Life insurer [2]

Answer 5

* Surplus first to policies 
    with-profit.
     - then to shareholders 
     - can keep working capital for
        tax payments or for writing 
        new business 
* Amount distributed depends on:
     - Provisions of capital 
     - margins for future adverse
        outflows
     - business objective 
     - Expectations of the 
       policyholders, shareholders,
       staff, stakeholders

Question 6

Distribution of Surplus of a Benefit Scheme [2]

Answer 6

• Surplus retained to:
  
  • Increase benefit
  • Lower future contributions
  • or go back to sponsor
    depending on fairness.
• factors affecting Surplus use:
  
  • legislation
  • scheme rules
  • tax treatment
  • discretion of sponsor/
    manager depending on:
    + risk exposure of parties
    + sources of the surplus
    + expected effect of the
    decision